Crypto Tax CPA Chicago

Whether you’re being audited due to your crypto, or your investments simply complicate the process, the goal is to verify that you filed your tax returns correctly and paid the correct amount.

Here’s how the cryptocurrency audit process works:

• The IRS will request records to support the information on your tax returns. This can include paychecks, bank statements, and receipts for any expenses you claimed.
• In the case of a cryptocurrency audit, you will also need a detailed report of your trading history for the years in question.
• The audit examiner’s primary goal is to determine whether you reported correctly and paid the right amount in taxes.
• At the end of your audit, they will evaluate the amount owed. Collections won’t begin promptly, and you have the option to appeal. 
• If, during your crypto audit, the IRS finds reason to believe you intentionally tried to hide funds or otherwise commit a tax crime, they may refer the case to the Criminal Investigations Division or the Department of Justice for prosecution.

Common triggers for a cryptocurrency audit include:

• Failing to report crypto on your tax return
• Omitting certain exchanges or wallets from your return
• Miscalculating your capital gains or ordinary income

Many digital asset exchanges report some information about your activity to the IRS. If your tax return doesn’t match, you could be flagged. This is true even if you lost money or gained minimal profits.

Once the IRS starts receiving Form 1099-DA from crypto exchanges, we anticipate that cryptocurrency audits will surge.

A standard audit covers your last 3 years of tax returns. However, during the audit process, if the IRS finds reason to believe you’ve underreported by at least 25%, they can go back 6 years.

If you’ve held crypto for several years and haven’t always reported it properly, there’s a good chance of this occurring to you.

For instance, let’s say you’re facing a crypto audit covering the years of 2017, 2018, and 2019. When the IRS examiner reviews your records for 2017, they notice that some coins were sold. They inquire when you first acquired those coins, and you tell them you purchased the coins in 2014. 

If you didn’t report any cryptocurrency before 2017, the IRS examiner might now have reason to believe that you’ve significantly underreported your taxable income. The years of 2014, 2015, and 2016 may then be opened to an audit as well.

If the IRS believes you’ve committed tax fraud, there is no statute of limitations for the audit. They can examine as far back as they want in that case.

As we mentioned above, most IRS examiners don’t even comprehend what Bitcoin is—let alone how it should be reported. You need a tax lawyer on your team who:

• Knows how to navigate the audit process
• Can build an accurate crypto tax report (even if you’ve lost keys or used a now-obsolete exchange)
• Knows digital asset tax law inside and out to defend your reporting methods

A crypto tax report is a detailed accounting of every single trade—including timestamps of when you bought and sold, the initial amount you spent on the coin, and how much you sold it for. This information is used to calculate your capital gain or loss for each transaction. 

There are additional factors to consider, too: Long-term gains and short-term gains are taxed at different rates. Some crypto is counted as income and must be reported separately. 

Building a proper crypto tax report can be a meticulous, time-consuming process. Do not assume the IRS will put in the effort to calculate the correct amount owed for you!

We’ve assisted hundreds of clients in creating crypto tax reports for past years, even if they don’t have complete records or have lost access to old wallets. We know the law thoroughly, so we can create crypto tax reports that stand up to the most rigorous IRS examination.

Many of our crypto clients haven’t reported because they fear they won’t be able to pay the taxes they owe on crypto gains.

What most people don’t realize is that the audit process is solely concerned with calculating the amount you owe. You do not have to pay your full tax bill immediately after the cryptocurrency audit concludes. 

You can create a payment plan with the IRS. There’s almost always a payment plan or resolution option that suits our clients and satisfies the IRS.

You can even appeal your crypto audit results! Our tax attorneys are licensed in US Tax Court, so we can appeal your audit decision to the highest levels.